Basic RSI Reversal Strategy

Basic RSI Reversal Strategy

forex chart

If you blindly buy any stock with an overbought reading, you will be buying continuously falling knives. Keep this in mind and don't throw away your chart reading skills in favour of relying on a mathematical equation.

The simplest and most effective method for trading the RSI is to combine trend following and mean reversion in Metatrader 4 Exness download. Use trend following to select the stocks you want to trade: Stocks in strong trends, and mean reversion to select your entries: Buying pullbacks in the direction of the trend.

Let's use an example. Suppose we want to be in a trade for about three days and trade on a daily chart. We should use a 3-period RSI. For RSIs with shorter look-back periods, the overbought and oversold levels will be 80 and 20 respectively. This is due to their tendency to lash out more at shorter look-back periods.

Our entry criteria will be when the RSI is below Here is an example of what this looks like:

MACD

MACD stands for moving average convergence divergence. It's a pretty confusing name, but it's mostly jargon. In reality, MACD is quite simple.

The MACD indicator consists of three components:

    Two exponential moving averages (default values are usually 12 and 26).
    MACD line = shorter-term EMA - longer-term EMA

In the following figure, the two moving averages are represented by lines, while the MACD line is drawn as a histogram.

The MACD is a trend following and momentum indicator, i.e. it is used to identify situations where supply and demand shift significantly in one direction over time.

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Ways to use the MACD indicator

The MACD is a versatile momentum indicator. Unlike the RSI indicator, which is generally used for a specific purpose, each trader who uses the MACD applies it in different ways.

MACD crossovers

A "crossover" trade is when the entry criteria for your trade is dependent on one line crossing another. In the case of MACD, you can trade crossovers of moving averages: Go long when the short-term EMA crosses the long-term EMA, and vice versa. Another option is to go long (or short) when the MACD line crosses above (or below) the zero line.

Higher highs and higher lows

At its simplest, a stock trend is simply a series of higher highs and higher lows for uptrends and lower lows/lowers for downtrends.

You can apply the same simple trend analysis to the MACD indicator. The difference is that here you would look at "momentum" highs and lows as opposed to just price levels.

Using momentum highs and lows has its advantages. There is a classic stock market maxim that Linda Raschke has repeated several times: "Momentum precedes price", in other words, high momentum tends to precede large price moves.

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